Explanation

As a new franchise system, 101 Chicken HQ has no history of franchisee turnover reported in Item 20. While this means there are no negative signals, it also means there is no track record to evaluate. High turnover in established systems can indicate franchisee dissatisfaction, lack of profitability, or poor support. You will be one of the first to test the system's viability and support structure, making discussions with the first licensees critical.

Potential Mitigations

• It is crucial to speak with the two initial "licensees" listed in Exhibit G to understand their early experiences and satisfaction levels.
• Engage a business advisor to assess the risks associated with being an early franchisee in an unproven system.
• Your attorney can help you understand your rights and obligations if the system struggles to grow successfully.

Explanation

The risk of the franchisor growing too quickly to provide adequate support was not identified. 101 Chicken HQ is a new system with very few outlets and modest growth projections. In some systems, rapid expansion can strain resources, leading to a decline in the quality of training, site selection assistance, and ongoing operational support for franchisees. The current slow growth plan appears appropriate for a new system.

Potential Mitigations

• Your business advisor can help you monitor the franchisor's growth plans for any signs of future unsustainable expansion.
• Discussing the support infrastructure with the earliest franchisees can provide insight into the franchisor's current capabilities.
• An attorney can review any future changes to the franchisor's support commitments in the Operations Manual.

Explanation

This risk was not identified, as Item 1 indicates 101 Chicken HQ is not owned by a private equity firm. When a franchisor is owned by a PE firm, there can be a risk that short-term financial goals for investors may be prioritized over the long-term health of the franchisees and the brand. This can sometimes lead to increased fees, reduced support, or a quick sale of the system.

Potential Mitigations

• It is always wise for an attorney to review the franchisor's right to sell or assign the franchise system, regardless of ownership structure.
• Understanding the franchisor's long-term vision for the brand can be clarified through discussions with management, assisted by your business advisor.
• An accountant can help you analyze the financial stability and motivations of any ownership group.

Explanation

This risk was not identified in the FDD. Item 1 clearly states that 101 Chicken HQ does not have a parent company. In some cases, a franchisor might be a thinly capitalized subsidiary of a larger, undisclosed parent. This can obscure the true financial backing and control of the franchise system, making it difficult for a franchisee to assess the overall stability and resources available for support.

Potential Mitigations

• Your attorney can help verify the corporate structure and ensure all controlling entities and affiliates are properly disclosed.
• If a parent company were involved, an accountant would need to review its financial statements to assess the true financial health of the system.
• A business advisor can help research the relationships between the franchisor and its disclosed affiliates.

Explanation

This risk was not identified, as Item 1 discloses that the franchisor has no predecessors. When a franchisor acquires a system from a predecessor, it's important to review the predecessor's history for issues like litigation, bankruptcy, or high franchisee turnover. Such a history could indicate underlying problems with the business model or brand that may have been inherited by the new franchisor.

Potential Mitigations

• An attorney should always confirm statements about predecessors and corporate history.
• Researching a brand's history online can sometimes reveal information about prior ownership structures.
• Speaking with long-term franchisees in an established system can uncover details about their experiences under any previous owners.

Explanation

The FDD discloses no litigation history in Item 3, which is consistent with a new franchise system. For established franchisors, a pattern of lawsuits, particularly those initiated by franchisees alleging fraud or misrepresentation, can be a significant red flag. It may indicate systemic problems in franchisee relations, disclosure practices, or the viability of the business model itself.

Potential Mitigations

• An attorney can conduct public record searches to verify the "no litigation" disclosure.
• It is beneficial to periodically check for litigation involving the franchisor as the system grows.
• Establishing good communication with other franchisees can provide early warnings of systemic issues that might lead to future litigation.